The activity of Islamic banking system
Курсовой проект - Банковское дело
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to subscribe. Instead of sharing in the banks profit, the investors would share the profits of the enterprise in which funds are placed with the bank taking a management fee for its work. Banks can also offer open-ended Multiple Equity Funds to be invested in stocks.and medium enterprises (SME) sector has a great potential for expanding production capacity and self-employment opportunities in the country. Enhancing the role of financial sector in development of SME sub-sector could mitigate the serious problems of unemployment and low level of exports. The banks may introduce SME Financing Funds with various geographical locations. The corporate sector and the commercial banks may set up a network of such Funds under the aegis of SECP by establishing institutions under syndicate arrangements or otherwise. [14]
Future challenges for Islamic banking and financeInnovation in Critical Areas:
Progress of Islamic banking will depend on its ability to innovate in the following areas:
Financial instruments yielding stable income flows for orphans, widows, pensioners and other weaker segments of the society
Financial instruments for meeting governments financing needs
Cover or security for financing, in particular Shariah-compliant alternatives for penalty on payment defaults
Formulas for pricing of Islamic financial products
Competition:
Islamic banks should be ready to brace not only intra-industry competition but also inter-industry competition from interest-based banks. The latter are already offering Islamic financial products. The competition is likely to grow.
Effect of Islamic banking on economy and economic life
The following effects are anticipated:
The real and financial sectors in the economy will be better integrated, as compared to what one finds in interest-based economies.
Both what the governments do and the way in which they work, will change.will mainly stem from the fact that without tax revenues, governments may address only those needs for which an economic transaction-other than pure loan transaction-can be defined between the government and the financiers.
Inter-bank money market and central banking will take new form. New matrix of Shariah-compliant divisible and tradable financial instruments and the Shariah parameters for contracts will give shape to this development.the above happens, the regulators will also have to ensure compliance with Basel requirements for international acceptability of Islamic banking. In cases of no conflict between the Shariah parameters and the Basel requirements, there would be no problem. However, where conflict arises, there will be need (1) to design Shariah-compatible ways for compliance with the Basel requirements and (2) to sell the same to the international regulators.
Accounting and financial management may undergo major changes. This would happen because Islam has different position on ownership, rules for transactions and the financial instruments.
Islamic banking will lead to better business ethics because banks will entertain only economically viable financing requests. Note that the said transformation shall take place even without prior moral uplift of the society for Islamic banking. Careful design of Islamic financial instruments will discourage unscrupulous behavior by fund-seekers. [15]
The Islamic Development Bank
The Islamic Development Bank, a specialized institution of the Organization of the Islamic Conference (OIC), is an international financing institution. Its purpose is to foster the economic development and social progress of Muslim countries and Muslim Communities in accordance with the principles of the Shariah and to bridge the gap between rich and poor member-countries. IDB is the first international financial institution to commit itself to conduct its activities in conformity with the Shariah. As a result, the prohibition of Riba in Islam and the implications thereof have motivated certain conceptual and operational features which distinguish the IDB from other international development banks and other institutions having words purposes. The Bank is authorized to accept deposits and to mobilize financial resources only through Shariah compatible modes and is authorized to levy a service fee to cover its administrative expenses instead of working on the basis of interest. The major source of IDBs finance has been the capital subscriptions of its members. Repayment of existing lines of credit enabled to have additional funds to support the activities of the IDB after the initial capital injections. And as the bank is providing temporary assistance rather than making grants, the capital is revolving and replenishes itself. of the strategic objectives of IDB is to improve and enhance the level of intra trade among its member countries from the developing world. Therefore, the bank assists in the promotion of foreign trade among Muslim countries, by providing financial assistance to member countries and Muslim communities in non-member countries and by developing human capital. IDB also acts as a catalyst in these intra trade activities by participating in equity capital through investment in economic and social infrastructure projects and by granting loans for productive projects in the private and public sectors. Equity-financing and profit-sharing functions are the primary modes of operational financing and loan-financing adopted by the IDB. , one of IDBs missions is to undertake research to enable the economic, financial and banking activities in Muslim countries to conform to the Shariah and to develop Islamic finance as a competitive advantage. In fact, thanks to the role played by the IDB, the Islamic baking world has stepped up efforts to standardize regulation and supervision. The bank plays a key role in developing internationally acceptable standards and procedures and strengthening the sectors architecture in different countries. [16]
Operations and objectives
The purpose of the Islamic Development Bank since its foundation is to foster the economic development and social progress of member Muslim majority countries as well as Muslim communities in non-member countries individually as well as jointly in accordance with the principles of Shariah. This is what distinguishes the IDB from other regional and international developmental institution; in fact it is obliged by its own charter to follow the Shariah in all of its functions and operations. The Islamic prohibition of interest and the implications thereof have forced the IDB to have certain distinguishing conceptual and operational features. The IDB foresees different ways of financial involvement with its clientele from the ways of the conventional multinational development banks. The equity participation and profit sharing functions of the bank together with the Shariah implied restrictions on the powers of the Bank in so far as accepting deposits, raising funds and suitably investing funds not needed in its operations are concerned, are some of the major issues that the bank had to consider in its planning stages. Among activities undertaken by IDB there are participation in equity capital of productive projects, investment in economic and social infrastructure projects, the promotion of foreign trade, primarily in capital goods and acceptance of deposits or the raising of funds in any other manner.other multilateral financial institutions, the IDB finances its operations through a number of modes of finance that are compatible with Shariah. Loan financing is mainly intended for social, economic and infrastructure projects that are unlikely to be revenue generating and have a long implementation phase. These include schools, water supplies, health centers, hospitals, rural electrification, roads, ports, airports, irrigation schemes and land development. In addition, the IDB participates in the share capital of new or existing enterprises, through equity participation, even though a ruling of the Islamic Fiqh Academy prohibits equity participation with companies that use interest-based financing, therefore, the IDB has taken initiatives to assist successful companies in utilizing alternative Shariah-compatible modes of financing in close collaboration with Islamic banks. Leasing is another mode of financing used by the IDB because it meets the objective of providing finance for development projects that are sufficiently remunerative to meet market criteria. Leasing involves the purchase and subsequent transfer of the right of usage of equipment to the beneficiary for a specific period of time, during which the IDB retains ownership of the asset. Application of mark-up rate is determined on the basis of sector as well as on rate of return of a project. Installment sale has also become a most significant mode of financing because of its operational flexibility.this mode, IDB purchases equipment and machinery, reselling it to the beneficiary at a higher price. The main operational difference between this mode and lease financing is that ownership of the asset is transferred to the beneficiary on delivery in the case of installment sale. Besides, the purpose of the Longer Term Trade Financing Scheme is to promote the export of non-traditional goods among OIC member countries through the provision of necessary funds. The scheme has its own independent budget and resources. It is managed and operated under the supervision of the IDB. Moreover, IDB provides technical assistance to member countries for identification, preparation and implementation of projects as well as for institution building. Priority for technical assistance is given to LDMCs as well as regional projects. The assistance is extended in the form of a loan, grant or both. IDB also finances c